Many Lack Basic Retirement Income Knowledge

A large majority (80%) of retirement-age Americans received
failing grades after taking a basic quiz on how to make their nest eggs last
throughout retirement, according to The American College of Financial Services.
A recent survey from the organization revealed the well-known “4% rule” is a
complete mystery to seven in 10 Americans, and a majority of people age 60 to
75 with at least $100,000 in assets lack important knowledge in areas such as
life expectancy, Social Security, long-term care needs, investment risk, and
more.

Despite their failing grades, the RICP Retirement Income
Literacy Survey indicated more than half (55%) of respondents consider
themselves prepared to meet their income needs in retirement, and almost
all (91%) are at least moderately confident in their ability to achieve a
secure retirement.

“No one liked getting Fs back in school, but retirement
income literacy is a test Americans simply cannot afford to fail,” says David
Littell, RICP retirement income program director at The New York Life Center
for Retirement Income at The American College. “When you’re working, you can
plan, save, and prepare for a retirement target date. But once you’re in
retirement, there is no set target date for how long your savings must last,
and little room for error.”

With a majority unfamiliar with the “4% rule,” many
Americans are unaware of how to preserve their assets in retirement. The survey
showed 16% thought it would be safe to withdraw 6% or even 8% per year, while
20% were overly conservative, estimating 2% to be the appropriate annual
withdrawal rate. Additionally, only half (53%) know that it can be beneficial
to wait until age 70 to claim Social Security for someone with a long life
expectancy.

The
survey displayed that Americans also lack knowledge when it comes to
understanding investments, with only two in five (39%) aware that when interest
rates rise, the value of bond funds will often decrease. Littell explains that poor
investment decisions by retirement-age Americans can be almost impossible to
bounce back from, and can damage both the future growth of a nest egg and the
retirement income it can generate over time.

Americans struggle with managing and understanding risk
around retirement income, as more than half (51%) underestimate the life
expectancy of a 65-year-old man. The study revealed Americans’ lack of
knowledge about how much time people should plan to live in retirement, as well
as their uncertainty about how to transition into the drawdown phase. Just 30%
recognize that it can be more effective to work two years longer or defer
Social Security for two years than to increase retirement contributions by 3% for
five years.

Americans are facing a retirement income planning deficit
and they need help planning, the survey finds. Only 27% report having a written
retirement plan in place, despite the fact that 63% say they have a
relationship with a financial adviser and 52% state they are at least
moderately concerned about running out of money in retirement. In addition, 33%
have never tried to figure out how much they need to accumulate to retire
securely.

“Basic
financial literacy during the working years is dramatically different from the
mindset people need when they transition to generating retirement income from
their nest eggs,” Littell explains. “Financial advisers, plan sponsors, and
financial services companies all have a role to play in raising Americans’
grades when it comes to awareness and understanding of basic retirement income
principles.”